The cost of insuring Greek debt
against default rose to a record after Moody’s Investors Service
cut the country’s credit rating by three notches.

The Finance Ministry in Athens called the move, which sent
its rating to B1 from Ba1, “completely unjustified.” Moody’s
said lagging tax collection and “implementation risks” would
make it more difficult to reach budget-cutting targets in a 110
billion-euro ($154 billion) bailout.

“The risk has materially increased of a default event,”
said Sarah Carlson, Moody’s senior analyst for Greece, said in a
telephone interview today from London. “Our central view is
that the Greek government will achieve its objectives and it
won’t need to impose losses on credits, but there are material
risks to that outcome.”

European leaders are trying to hammer out by the end of the
month a package of measures to contain the debt crisis that led
to bailouts last year of Greece and Ireland. Optimism that the
measures would include using the 440 billion-euro European
Financial Stability Facility to allow Greece to buy back some of
its debt and pay lower interest rates on aid has receded with
growing German resistance to the proposals.

Credit-default swaps on Greece jumped 50 basis points to a
record 1,036, according to CMA. The yield on 10-year Greek notes
rose 11 basis points to 12.36 percent, the most in the euro
region. The premium that investors demand to hold the bonds
instead of benchmark German bunds widened 9 basis points to 907
basis points, the highest since Jan. 10.

‘Incomprehensible’

The Greek Finance Ministry slammed the Moody’s decision as
“incomprehensible.” Moody’s didn’t heed the progress Greece
made in cutting the deficit by 6 percentage points of gross
domestic product last year, according to a ministry statement.

“Moody’s downgrading of Greece’s debt reveals more about
the misaligned incentives and the lack of accountability of
credit-rating agencies than the genuine state or prospects of
the Greek economy,” the statement said. “Having completely
missed the build-up of risk that led to the global financial
crisis in 2008, the rating agencies are now competing with each
other to be the first to identify risks that will lead to the
next crisis.”

“We did consider a range of likely outcomes, but really
our concern is much more long term,” she said. “Whatever
decisions are taken at the end of the month are not something
that would change our long-term outlook.”

The European Commission forecast in November that Greek
debt last year would reach 140 percent of GDP, the highest in
the euro region and would peak at 156 percent of GDP in 2012.

While Moody’s praised the government for making “very
significant progress” in cutting its deficit, officials there
still face an “enormous task” in delivering on the pledges
contained in the bailout program.

The prospect that German Chancellor Angela Merkel will push
through her demands that private bondholders assume some of the
cost of future bailouts was also part of Moody’s thinking.

“Given that the quid-pro-quo for ongoing support could be
some kind of restructuring event,” Carlson said. “We wanted to
reflect that in the rating.”

Greece accepted the bailout from the European Union and the International Monetary Fund in May after its financing costs
surged, leaving the country unable to sell bonds. Greece has
resumed selling treasury bills and Finance Minister George Papaconstantinou is aiming to sell longer-term debt this year.
Almost a year after the bailout, Greek 10-year bonds still yield
more than 9 percentage points more than comparable German debt.

‘Deteriorating Finances’

The Moody’s decision “was hardly a surprise, but it did
remind the market of Greece’s deteriorating finances, the high
interest-rate burden they face along with the roll-over risk and
potential need for restructuring,” said Charles Diebel, head of
market strategy at Lloyds Bank Corporate Markets in London.
“Greece at this point in time is in considerable trouble.”

Prime Minister George Papandreou’s government cut spending
and raised taxes last year to bring down the budget deficit to
9.4 percent of GDP from 15.4 percent in 2009. The government
will detail additional measures for 2012 to 2014 by the end of
March amounting to 8 percent of GDP as it tries to bring the
deficit below 3 percent under the terms of the bailout.

Tax Collecting

Much of the deficit progress was achieved through cutting government spending, including civil-servant wages and raising
value-added taxes. Efforts to boost revenue by cracking down on tax evasion have fallen short. The government boosted ordinary
revenue by 5.5 percent in 2010, less than half the initial
target of 13.7 percent. The goal was reduced twice to 6 percent.

“The kind of revenue that was scheduled to be captured
through anti-tax evasion measures was fairly modest and remains
fairly modest, but revenue generation came in well below what
was anticipated,” Carlson said.

Boosting revenue from collecting income tax is “proving to
be more challenging for the government than we had
anticipated,” she said.

Greece lost its last investment grade rating on Jan. 14
when Fitch Ratings cut it to BB+ from BBB-. Moody’s had last
lowered its rating on Greece in June, when it implemented a
four-step cut to a non-investment grade rating.

Moody’s today said that about 20 percent of B1-rated
sovereigns, non-financial companies and financial institutions
default within a five-year period.